Wall Street Drives Up Gas Prices... Ripping Us Off and Killing Jobs

Submitted by SadInAmerica on Sun, 05/13/2012 - 11:04am.

Next time you fill up your tank, remember that $10 to $25 is going right from your pocket to the financial sector. Gasoline prices have been falling in recent weeks, but they're still
close to their five-year high after climbing steeply for three years. ~ Les Leopold

For every penny increase at the pump, $1.4 billion per year leaves our collective pockets, creating a drag on the sluggish “recovery.” Where does it go and what caused the price explosion at the pump?

It's a common belief that oil prices are set on the world market by
supply and demand. Less supply and/or more demand causes prices to rise.
Oil is getting harder to find; OPEC is holding back supply; China and
India are guzzling it up; Iran is threatening to blow it up. And
regulations are getting in the way of drill, baby, drill -- end of
story.

But this fixation on blind market forces ignores the fact that Wall
Street is financializing the commodities markets – especially oil – as
it seeks new ways to pick our pockets. The same greedy swindlers who
puffed up the housing bubble and then milked it dry are now hard at work
doing the same with gasoline.

Financialization is a process whereby financial markets, financial
institutions, and financial elites gain greater influence over economic
policy and economic outcomes... Its principal impacts are to

(1) elevate
the significance of the financial sector relative to the real sector,

(2) transfer income from the real sector to the financial sector, and

(3) increase income inequality and contribute to wage stagnation.

In short, we’re talking about the spread and growing supremacy of
financial gambling – the ability to bet on the prices of goods produced
in the real economy without actually owning those goods.

The vital activities of manufacturing, resource extraction and
agriculture are turned into financial instruments that can be rapidly
bought and sold. More to the point, financialization allows financial
gamblers to extract profits from the real economy to enrich themselves without producing any real economic value for our economy.

When markets are financialized, they offer a myriad of ways for Wall
Street firms to bend or break laws to manipulate markets and haul in
enormous profits.

In effect, financialization extracts a hidden tax from
the real economy which is then passed onto us in the form of higher
prices, economic hardship and then government bailouts when it all comes
crashing down.

The oil markets have become just another profitable Wall Street
casino. Why? Because, as the infamous outlaw Willie Sutton said, “That’s
where the money is.” Oil markets as well as other commodity markets
require a certain number of speculators.

Oil producers and end users go
to these markets in order to lock in prices for the products they use
or sell. From refiners to shippers to airlines, oil markets provide a
way to obtain price certainty for a specified period of time.

To make
these markets function, speculators are needed to take the other side of
those trades. For more than a century about 30 percent of these
commodity markets involved speculators and 70 percent of the
participants in terms of volume were real producers, distributors and
users. That’s what a healthy commodities market looks like.

Once financialization metastasized, the proportions flipped. Now 70 percent of the action comes from speculators,
while only 30 percent comes from those who really produce, distribute
and use the actual commodities. The casino has taken over.

This speculative invasion is why gasoline prices are climbing
rapidly. The only question remaining is how much of the price rise is
due to excess speculation. Here’s what the experts say:

The St. Louis Federal Reserve (not exactly a Marxist
institution) claims that 15 percent of the rise in gasoline prices is
due to Wall Street speculation (PDF).

A report from the House Committee on Government Oversight claims that up to 30 percent of the rise may be due to speculators.

Even experts at Goldman Sachs, of all places, say that “excessive speculation is causing oil prices to spike by up to 40%.”

And Saudi Arabia, ”the largest exporter of oil in the world, told the Bush administration back in 2008, during the last major spike in oil prices, that speculation was responsible for about $40 of a barrel of oil.”

This flip in the balance of real economic activity and speculation is
precisely what John Maynard Keynes warned us about more than 75 years
ago:

"Speculators may do
no harm as bubbles on a steady stream of enterprise. But the position is
serious when enterprise becomes the bubble on a whirlpool of
speculation. When the capital development of a country becomes a
by-product of the activities of a casino, the job is likely to be
ill-done.

The measure of success attained by Wall Street, regarded as an
institution of which the proper social purpose is to direct new
investment into the most profitable channels in terms of future yield,
cannot be claimed as one of the outstanding triumphs of laissez-faire
capitalism…."

A look at the top 20 speculators reveals that only five are actually
involved in producing, shipping, refining and consuming oil (Vitol, CMA,
ENA, Semgroup and Emirates Oil).

The other 15 are banks and investment
houses – a virtual who’s who of Wall Street firms that puffed up the
housing bubble and took down the economy. Goldman Sachs, Morgan Stanley,
JP Morgan Chase, Merrill Lynch, Citigroup -- they all make the list.

A tale of two casinos

It’s stunning to compare the similarities between the housing bubble
and the rise in oil prices. Just take a look at the two charts below.
The first shows the price of a barrel of oil after eliminating the
impact of inflation.

You can see the price spike in the 1970s during the
Iranian oil boycott, and then in the 1990s during the Persian Gulf War.
Clearly, those significant geopolitical events disrupted supplies and
had a real impact on the price of oil.

Look what happened when the Wall Street big boys jumped into the
oil speculative business right around 2002-'03. The price of oil went
bonkers. The gyrations were far more extreme than any of the previous
geopolitical events.

There is no rational supply-and-demand explanation
that accounts for that dramatic rise. Sure, after the economy crashed
in 2008 prices declined. That makes sense. But up again goes the price
of oil even though we’re facing nothing like the supply and demand
shifts caused by oil boycotts and wars.

Then again, maybe it does
indicate a new war – Wall Street versus the rest of us.

Now take a look at the housing bubble graph – similar shape, similar
timing. And that’s no coincidence. When Wall Street turns a market into
an enormous casino, prices skyrocket and the economy is threatened.

Wall
Street did it to housing and now they’re doing it again to commodities
-- especially oil.

When Wall Street jacks up gasoline prices through its speculative
activities, it has two job-killing impacts.

First, it sucks money out
of our pockets to pay for gasoline, which in turn means we have less
money to spend on other goods and services in the real economy. It’s the
equivalent of an anti-stimulus tax.

The second impact is more complex but just as real to unemployed oil
workers on the East Coast where several refineries in the Philadelphia
area are being shut down even though the price of refined gasoline is
rising.

Here’s where it gets tricky. The East Coast gets its oil primarily
from the North Sea. That’s called Brent oil. The rest of the country
gets most of its oil from the Gulf Coast. That’s called West Texas. The
two kinds of oil are very similar in content and traditionally were
similarly priced. Not any more.

As the chart below illustrates, a gap has emerged so that Brent oil
is now significantly more expensive. This means that the oil coming
into East Coast refineries is more costly to refine.

The increased
cost can’t be passed on at the pump because the national prices are
mostly set by the lower cost West Texas oil (and from European
refineries that are dumping gasoline in the U.S. as Europe switches more
and more to diesel).

As a result, East Coast refinery profits are
squeezed, which in turn leads to the shutdowns.

Some experts say Brent oil is becoming more expensive because other oil
supplies coming into Europe from the Middle East are more vulnerable
and uncertain due to the Iranian situation and the Arab Spring. Maybe
so. Speculation also is at work.

Because oil speculation
regulations are more lax in London, it is likely that Brent oil is the
raw material for a more profitable casino. As Wall Street money pours
in, up go the prices...and down go the refineries and thousands of
refinery workers.

But wait, isn’t Wall Street helping the environment by driving up gasoline prices?

Without question the rise in gasoline prices moves the nation toward
more fuel-efficient cars, which in turn will reduce greenhouse gas
pollution. Relying on Wall Street to cause this dynamic is
ridiculous, foolish and grossly unfair.

First, because Wall Street
speculators not only drive up prices they create price instability –
rising prices followed by rapid crashes. If a recession follows, gas
prices will crash and the incentive to purchase fuel-efficient cars will
disappear.

Second, rising gas prices without offsetting credits for
low-income people are very regressive – meaning lower-income people pay a
higher share of their income on fuel costs.

More galling is the fact that Wall Street speculators are
pocketing what amounts to a gas tax as if they were the duly-elected
government of the United States (maybe they are the government, but not duly-elected).

If we want to tax carbon for the sake of the environment (and we
should), then the government should do so and collect the revenues, not
Wall Street. And if we think that Wall Street’s nefarious way is better
than nothing at all, than heaven help us.

How do we rein in the speculation?

President Obama recently called for $58 million
in order to put “more cops on the beat” at the regulatory agencies that
police the commodities markets. Supposedly these extra cops would be
able to prosecute more cases of price manipulation and other blatant
violations of the rules and regulations that govern commodity trading.

This effort, while laudable, doesn’t go nearly far enough. The best
way to check speculation may be through a financial transaction tax that
makes it less profitable to speculate in commodity markets.

A
relatively small tax on all financial transactions would likely reduce
the number of bogus speculators. That’s the only message they
understand. Enforcement of weak rules matters little to those who spend
all their waking hours playing and dreaming up new financial casino
games.

The only way forward is to take away their chips.

Unfortunately, the Obama administration opposes any and all financial
taxes for fear they will upset financial markets. Well, this market is
already upset by financial greed and corruption. Hopefully, the
administration will learn before it's too late that the American people
are sick and tired of being fleeced by Wall Street.

In the meantime, next time you fill up your tank, remind yourself
that something like $10 to $25 is going right from your pocket to Wall
Street. Maybe that will get us to join the fight for a financial
transaction tax. It’s long overdue.

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